Chronic Deflation in Japan

Abstract

Japan has suffered from long-lasting but mild deflation since the latter half of the 1990s. Estimates of a standard Phillips curve indicate that a decline in inflation expectations, the negative output gap, and other factors such as a decline in import prices and a higher exchange rate, all account for some of this development. These factors, in turn, reflect various underlying structural features of the economy. This paper examines a long list of these structural features that may explain Japan's chronic deflation, including the zero-lower bound on the nominal interest rate, public attitudes toward the price level, central bank communication, weaker growth expectations coupled with declining potential growth or the lower natural rate of interest, risk averse banking behavior, deregulation, and the rise of emerging economies.

JEL ClassificationsE31, E58, O53

Keywordsdeflation, Japan

This paper is a summary of findings presented at the conference on "Price Developments in Japan and Their Backgrounds: Experiences Since the 1990s" jointly held by the Center for Advanced Research in Finance (CARF) of the University of Tokyo and the Research and Statistics Department of the Bank of Japan on November 24, 2011. We would like to thank all the participants, and especially the authors of submitted paper, who generously have permitted us to present their main results. We would also like to thank seminar participants at Columbia University, the Federal Reserve Board, the Federal Reserve Bank of New York, and the Bank for International Settlements Research Workshop on "Globalisation and Inflation Dynamics in Asia and the Pacific," in particular, Eiji Maeda, Etsuro Shioji, Nobutoshi Kitaura, David Weinstein, Neil Ericsson, and Hibiki Ichiue, for useful comments and discussions. We are solely responsible for any remaining errors in the paper. The views expressed in this paper do not necessarily reflect those of the Bank of Japan.

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